Who should appoint the auditors for a nonprofit? Some Board members who work for large companies say that since Sarbanes-Oxley requires the Audit Committee to pick auditors, we should follow the same rules. I told them that nonprofit law prohibits a committee other than the Executive Committee from acting on behalf of the corporation. Someone else argued that under the John Carver model of governance, the Board should set policy limits and get out of the way of the chief executive officer, who would be the one to appoint the auditors. What should we do?
State Nonprofit Corporation laws generally give the Board power to delegate functions to committees of other Board members without limitation to an Executive Committee. The Board could most likely delegate the selection of an auditor to an Audit Committee if it wished to do so.
The purpose behind the Sarbanes rule, which is not binding on nonprofits, is to have an "independent" group approve the auditors. In the for-profit world, the CEO and a lot of other members of the management team (reporting to the CEO) are usually on the Board, and it therefore makes sense to have an "independent" Audit Committee, which has no managers on it, make the decision. The auditors are theoretically less likely to be influenced by the management if they are not appointed (and retained) by the management.
In the nonprofit world, organizations do not usually have managers on the Board, and in most situations the entire Board is "independent." Therefore the purpose of the Sarbanes rule is fulfilled if the full Board makes the decision.
I personally like having the full Board make the decision because I like to see more of the directors pay attention to the financial situation. I would not recommend that the CEO make the decision, because that would totally undercut the need for independence.
Sunday, January 13, 2008
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